This was the week that World War III was supposed to erupt across Europe if you listened to the most alarmist reaction to the Russian occupation of Crimea. Ukraine mobilized their reserves and prepared for the worst while the whole world held its breath. So far, however, nothing has happened.
That is, the missiles aren’t flying and the troops aren’t advancing. There has been action, which is to say a lot more than a visit to Kiev by Secretary of State Kerry and some sternly worded European Union (EU) missives. The money has clearly been bet that there won’t be a war and even more money has been put down on making sure it doesn’t happen.
Think of it like the currency war that is going around the globe right now. This is the primary way that wars are fought now – with money.
This entire episode started when the EU was finishing up what they call the “Deep and Comprehensive Free Trade Agreement” (DCFTA). Like any good euro-document, it’s large, dense, and hard to boil down into simple bullet points. But the gist of the document is that pieces of the former USSR, especially Belarus and Ukraine, would have some association with the EU. Trade barriers would come down and everyone would become rich and happy according to the plan.
Two strange things happened on the way to Ukraine signing this treaty, however.
Ukraine has been more or less bankrupt for a long time, the largely corrupt government stringing things along and hoping for the best pretty much since the fall of the USSR in 1991. The first treaty creating close ties to the EU came in 1998 with the “Partnership and Cooperation Agreement,” which didn’t do much. They needed a kick to get things going, and the EU seemed like the way to do it.
President Yanukovich was adamant that Russia would never treat Ukraine like anything other than a servant and was one of the leaders pushing for the new treaty with Europe. It was his abrupt reversal on 21 November, announcing that he would not sign the treaty, that put everything into action. Protests erupted on the streets while Russian President Putin promised $15B in aid. Ukraine was looking to the East again.
What caused the reversal? It’s hard to say exactly, but we know two things that changed leading up to the decision.
First of all, Ukraine tried but could not secure money to keep Ukraine operating from the EU or the International Monetary Fund (IMF) on terms that were acceptable. Russia was willing to pay Ukraine to be its friend, and Ukraine needed the money badly enough that they had to take it.
The second point is that the DCFTA was not only about trade but increasingly about “Home Affairs” – increasing the primacy of the rule of law. Ukraine is one of the main homes of the Bratva (aka “Russian Mafia”) which specializes in cybercrime and human trafficking. The EU is eager to curb this, and ahead of the treaty signing spelled out exactly what they are looking for in order to make this happen.
Which spooked Russia more, the free trade or the imposition of the rule of law? That’s something to get into later.
Since Yanukovich was deposed, Russia cut off the $15B and sent troops into Crimea to secure the base. But the EU responded by finally understanding what Ukraine really needs to come to the West. They have pledged the same $15B to Ukraine now to replace the Russian aid. The US is considering how our new natural gas reserves can be used to wean Ukraine – and probably all of Europe – off of the need for Russian energy as well.
More to the point, Russia is being punished severely by international investors. Their stock market is down 7% this week and the Ruble is now down over 10% for the year. Inflation is running so high that their central bank had to raise interest rates to 7%, the highest in the developing or developed world.
While money is finally flowing into Ukraine from the West, it’s flowing out of Russia at least as rapidly.
Gold hasn’t moved that much, up almost 10% on the week to $1340 or so an ounce. It’s hardly the panic that a genuine European war would produce, meaning that investors do not seem to think that it’s likely
Given that investors aren’t betting on a war, the net flow out of Russia means that the people with money are literally putting it down on who they think is ultimately going to “win” this conflict. It ain’t Russia. If the EU finally realizes that there is a price to claiming Ukraine for the West and actually establishing the rule of law as they proposed they stand a good chance of stabilizing the situation and actually winning.
That doesn’t mean there won’t be an old fashioned shooting war yet. But the money has made their choice, and that seems to be that the EU has finally understood what it’s going to take to win this war. It’s not troops, at least so far, but Euros.